This Week In Securities Litigation (Week ending October 2, 2015)
September 30th Madness dominated this week. The drive for stats was evident as the Commission stacked up cases like cord wood at a pace seldom seen. Twenty-two municipal bond actions were filed in one swoop; an insider trading case; a financial fraud action; an offering case; an FCPA action; and more, much more. All got tossed on the heap. The numbers increased; the penalty dollars spiraled upward. September 30th Madness was in full force.
When it ended 50 new actions had been brought in the final days leading up to the magic date. And, that does not even count the 12j proceedings and other tag along actions the Commission adds to its stats (see article below). If stats are the any measure of SEC Enforcement – and somebody obviously thinks that is true – September 30th Madness makes the program a success. Now that it is October, however, back to business as usual – policing the markets, not counting cases and dollars.
SEC
Remarks: Commissioner Kara M. Stein delivered remarks titled “Market Structure in the 21st Century: Brining Light to the Dark,” to the Securities Traders Association’s 82 Annual Market Structure Conference (Sept. 30, 2015). Her remarks focused on brining light to dark pools and the development of the consolidated audit trail (here).
Meeting: The Equity Mart Structure Advisory Committee will meet on October 27, 2015. The meeting is open to the public and will be webcast.
CFTC
Whistleblowers: The agency announced its second whistleblower award. This award was $290,000.
Remarks: Chairman Timothy Massard addressed the 3rd Annual OTC Derivatives Summit North America (September 29, 2015). His remarks included comments on the overhaul of clearinghouse oversight, oversight of major market players, margin for uncleared swaps, trading and harmonizing and standardizing reporting (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 13 civil injunctive cases and 41 administrative actions, excluding 12j and tag-along proceedings.
Pyramid scheme: SEC v. Chen, Civil Action No. CV 15-07425 (C.D. Cal. Unsealed Oct. 1, 2015) is an action which names as defendants Steve Chen, US Fine Investment Arts, Inc. and a series of other entities. According to the firm’s website, USFIA is a subsidiary of, and was founded by, US China Consultation Association which claims to be a joint venture of the U.S. and China governments. The firm claims to own several mines, including amber mines in the Dominican Republic and Argentina. Since April 2103 USFIA and Mr. Chen have raised about $32 million. Investors were told about the mines and informed of an upcoming IPO for the firm. They were also assured of significant profits. In fact the firm is a multi-level pyramid scheme and a fraud. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). A freeze order was issued by the Court which also appointed a temporary receiver. The case is pending.
Investment fund fraud: SEC v. Wells, Civil Action No. 1:15-cv-07738 (S.D.N.Y. Filed October 1, 2015) is an action which names as defendants William Wells and Promitor Capital Management LLC. Mr. Wells was registered with FINRA as an Investment Company Product/Variable Contracts Representative years ago. He owns the firm which manages a fund. Since 2009 the defendants have raised about $1.1 million from at least 30 investors. Those investors were assured that Mr. Wells is a registered investment adviser and that their funds would be invested in particular stocks through individual accounts. Those claims were false. No accounts were created and there were almost no investments. Portions of the investor funds were used to repay other investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. Mr. Wells was also charged with securities and wire fraud by the Manhattan U.S. Attorney’s Office.
Independence: In the Matter of Grant Thornton India LLP, Adm. Proc. File No. 3-16879 (October 1, 2015); In the Matter of Grant Thornton Audit Pty Limited, Adm. Proc. File No. 3-16880 (October 1, 2015). GT India is a member firm of Grant Thornton International Ltd which operates in India. It is registered with the PCAOB. GT Audit is based in Australia and is also a member of the international firm and is registered with the PCAOB. Each matter results from the fact that two Grant Thornton Mauritius partners served on the board of directors of a Mauritius based subsidiary of their audit clients. Those partners performed prohibited non-audit services for that subsidiary. For GT India the violations occurred for the firm’s fiscal year ended March 31, 2013. For GT Audit, this impacted the audits for the fiscal years ended June 30, 2008, 2009, 2010 and 2011. Neither Respondent complied with Grant Thornton’s compliance control procedures. Each firm consented to the entry of a cease and desist order based on Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and was censured. In addition, GT India will pay disgorgement of $128,905, prejudgment interest and a penalty of $50,000. GT Audit will pay disgorgement of $88,683, prejudgment interest and a penalty of $75,000.
Insider trading: SEC v. Khan, Civil Action No. 3:14-cv-02743 (N.D. Cal.) is a previously filed action naming as defendants Ranjan Mendonsa and Ammar Akbari along with Mr. Khan and Roshanlal Chaganial. The complaint alleged that Mr. Khan was routinely tipped by his friend, defendant Chaganlal, a director in the finance department of Ross Stores. Mr. Khan then traded ahead of company press releases and tipped others. Defendants Ranjan Mendonsa and Ammar Akbari settled with the SEC. Each consented to the entry of a permanent injunction based on Exchange Act Section 10(b). The final judgment against Mr. Mendonsa also requires him to pay $614,375 in disgorgement, penalties and prejudgment interest. Mr. Akbari will pay $2,202 in disgorgement and prejudgment interest. See Lit. Rel. No. 23374 (October 1, 2015).
Investment fund fraud: SEC v. Commodore Financial Corp., Civil Action No. 15 –cv- 01567 (C.D. Cal. Filed September 30, 2015) is an action which names as defendants the company, its CEO Christopher Schlegel, M&G Cap Services and Andres Calvo. The complaint alleges that the defendants raised about $7.5 million from at least 84 investors through the sale of fractional interest in oil and gas wells. While the money raised was supposed to go to the development of the wells in fact only about half was used for that purpose. In addition, defendants did not have the expertise claims and the properties were not about to pay returns as represented. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 23376 (October 1, 2015).
Municipal bonds: In the Matter of Edward D. Jones & Co., L.P., Adm. Proc. File No. 3-16867 (September 30, 2015) is one of 22 actions brought under the Commission’s Municipalities Continuing Disclosure Cooperation Initiative. That initiative encouraged municipal bond underwriters to self-report violation in return for limits on possible penalties. The violations in this group of cases occurred from 2010 to 2014. During the period the underwriters used offering documents that contained materially false statements or omissions regarding the issuer’s compliance with its continuing disclosure obligations. Each firm consented to the entry of a cease and desist order and agreed to pay a civil penalty. A list of the firms involved is available here. The penalties ranged from a low of $20,000 to a high of $500,000. This is the second round of settlements under the initiative.
Manipulation: In the Matter of Edward T. Borg, Adm. Proc. File No. 3-16875 (September 30, 2015) is a proceeding which names as Respondents Mr. Borg, at one time the owner and a registered representative at All Funds, Inc., a broker-dealer established by his father, and Brian Mulkeen, the President, controller and COO of All Funds. Between 2003 and 2011 Mr. Borg is alleged to have manipulated the share price of All Funds repeatedly using matched orders, wash sales and other devices. He also encouraged many firm customers to buy the stock. At one point Mr. Borg and firm customers held about 55% of the shares. While customers made the required filings Mr. Borg did not until 2012. Before All Funds closed Mr. Borg moved many of his customers and himself to LPL Financial LLC where he continued his activities before being asked to leave. At that point many customers moved to TD Ameritrade. Although Mr. Borg was not employed there he convinced many of his customers to permit him to trade for them and was recorded on tape impersonating customers. Mr. Mulkeen was the COO of All Funds and failed to supervise Mr. Borg. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1), 10(b), 13(d) and 16(a). Mr. Borg resolved the action, agreeing to certain undertakings which preclude him from trading in stock except for personal accounts and which require he make the pertinent filings. He also consented to the entry of a cease and desist order based on the Sections cited in the Order. He is barred from the securities business and from participating in any penny stock offering. In addition, he will pay disgorgement of $145,727.50, prejudgment interest and a penalty of $1.3 million. Mr. Mulkeen also resolved the action, agreeing to be barred from the securities business and paying a penalty of $50,000.
Market structure: In the Matter of Latour Trading LLC, Adm. Proc. File No. 3016851 (September 30, 2015) is a proceeding naming the firm as a Respondent. Latour is a registered broker dealer which only engages in proprietary trading. It uses high speed trading. From October 2010 through August 2014 the firm sent about 12.6 million Intermarket Sweep Orders that did not comply with Reg NMS. The orders resulted from a coding change made by Latour’s parent without the firm’s knowledge or approval. That coding change resulted in an error in the software. In October 2010 the firm also made a series of changes to its ISO routing logic that resulted in sending ISOs to the market which at times did not comply with Reg NMS. The firm also failed to have adequate post-trade surveillance tools in place to detect its millions of non-complaint ISOs. Finally, the firm violated the market access rule and failed to have the required system of risk management controls and supervisory procedures in place or to take steps to establish that the ISOs sent to trading centers satisfied Reg NMS. The Order alleges violations of Exchange Act Section 15(c)(3) and Rule 15c3-5 and Rule 611(c) of Reg NMS. In resolving the action the Commission considered the remedial actions and cooperation of Respondent. The firm consented to the entry of a cease and desist order based on the Section and Rules cited in the Order. It also agreed to pay disgorgement of $2,784,875, prejudgment interest and a penalty of $5 million.
Financial fraud: SEC v. Godwin, Civil Action No. 15-cv-01414 (C.D. Ill. Filed September 30, 2015) is an action naming as defendants ContinuityXSolution’s CEO, David Godwin, and CFO, Anthony Roth. The complaint alleges that the firm, a provider of internet services, reported revenue of over $27 million for the period April 2011 through September 2012. In fact it had virtually none. The defendants fabricated it through deals such as recruiting a straw buyer who was promised that they would not have to pay for the services. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a)(, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23373 (Sept. 30, 2015); see also In the Matter of ContinuityXSolutions, Inc., Adm. Proc. File No. 3-16850 (Sept. 30, 2015)(Section 12j proceeding delisting the firm).
Disclosure: In the Matter of Focus Media Holding Limited, Adm. Proc. File No. 3-16852 (September 30, 2015) is a proceeding which names as Respondents the firm, a China based advertising company, and its founder and former chairman, Jason Jiang. The Order alleges that in 2010 an incentive based plan for executives was put in place under which 38% of Allyes Online Media Holdings Ltd., a subsidiary, was sold to Mr. Jiang and others for about $13.3 million. Not disclosed to shareholders was the fact that a hedge fund was bidding for the subsidiary. That firm was told to hold off. After the employee deal closed the hedge fund paid $124 million for the remaining 62%, implying an enterprise value of $200 million. The filings of the company failed to accurately reflect the transactions. Respondents contend they had no knowledge of the discussions between Allyes and the hedge fund. The Order, however, alleges that the Focus Media board did not receive accurate information and the public disclosures were false and misleading as a result of Respondents failure to head red flags about the transactions. Mr. Jiang was the largest beneficiary of the subsidiary deal. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceeding, Respondents consented to the entry of a cease and desist order based on the Section cited in the Order. The firm will pay a civil penalty of $34.6 million. Mr. Jiang will pay disgorgement of $9,690,000, prejudgment interest and a penalty equal to the amount of the disgorgement. A Fair Fund will be created.
Manipulation/supervision: In the Matter of James Goodland, Adm. Proc. File No. 3-16878 (September 30, 2015) names as Respondents the founder, president and COO of Securus Wealth Management, LLC, a registered investment adviser also named in the Order. From January 2010 through July 2013 the Order alleges that Mr. Goodland failed to supervise Howard Richards, an advisory representative associated with Securus. During that period Mr. Richards is alleged to have manipulated the share price of Gatekeeper USA, Inc., a start up entity traded in the gray market. The Order alleges violations of Advisers Act Section 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Respondent Securus was also censured. Mr. Goodland was barred from the securities business in a supervisory capacity. He will also pay a civil money penalty of $30,000. See also In the Matter of Howard Richards, Adm. Proc. File No. 3-16877 (September 30, 2015)(proceeding based on the manipulation referenced above alleging violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2); Mr. Richards consented to the entry of a cease and desist order based on the Sections cited in the Order, is barred from the securities business and from participating in any penny stock offering and will pay disgorgement of $62,000, prejudgment interest and a penalty of $75,000). A Fair Fund will be established with the amounts paid from both proceedings.
Investment fraud: SEC v. Riel, Civil Action No. 5:15-cv-0116 (N.D.N.Y. Filed September 29, 2015) is an action which names as defendants Charles Reil and his firm, REinvest LLC. The defendants raised over $280,000 from five investors who purchased the securities of Reinvest. Those investors were told that the firm invested in high yield financial growth vehicles that would generate substantial returns. Instead, Mr. Reil misappropriated the funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 23371 (Sept. 30, 2015).
Bar order: SEC v. Moore, Civil Action No. 2:15-cv-01865 (D. Nev. Filed Sept. 29, 2015) is an action naming Michael Moore as a defendant. Previously, Mr. Moore was permanently suspended from appearing and practicing before the Commission as an accountant by an SEC order. He was also barred from associating with a PCAOB registered accounting firm by an order of the Board. Mr. Moore is alleged to have violated the SEC order in connection with the audits of two issues and the PCAOB directive by his work for one company. The complaint seeks a permanent injunction. See Lit. Rel. No. 23371 (Sept. 30, 2015).
Improper lending: In the Matter of UBS Financial Services Incorporated of Puerto Rico, Adm. Proc. File No. 3-16846 (September 29, 2015). When the bond market collapsed in Puerto Rico many clients at UBS Financial Services Incorporated of Puerto Rico had significant losses. Many had purchased shares of UBS PR closed-end funds or CEFs. UBSPR had been selling shares of these funds for years. Indeed, the firm offered customers a number of CEFs and had served as the primary underwriter for 23 CEFs. The often highly leveraged securities are not eligible for margin and are not registered with the SEC. A number of the customers had purchased the CEFs with funds acquired from lines of credit obtained from BUSA, an FDIC insured Utah based bank affiliated with UBS. The acquisitions, which violated UBSPR policies, was orchestrated by long time registered representative Jose Ramirez, who was supervised by branch manager Ramiro Colon. The firm failed to supervise the broker who was charged with fraud, according to the Order. The Order alleges violations of Exchange Act Section 15(b). To resolve the matter the firm consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The firm will also pay disgorgement of $1,188,149.41, prejudgment interest and a penalty of $13,637,653.62. See also In the Matter of Ramiro L. Colon, III, Adm. Proc. File No. 3-16847 (September 29, 2015)(action against branch manager for failure to supervise resolved with an order suspending him from any supervisory position or from participating in a penny stock offering for 12 months and imposing a penalty of $25,000); SEC v. Ramirez, Civil Action No. 3:15-cv-02365 (D. P.R. Filed September 29, 2015)(action alleging violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) against the broker; it is in litigation). See Lit. Rel. No. 23369 (Sept. 29, 2015). In addition, see FINRA Press Release (Sept. 29, 2015)(regulator fined UBSPR $7.5 million for supervisory failures).
Self- dealing: SEC v. Weiss, Civil Action No. 1:15-cv-13460 (D. Mass. Filed September 29, 2015) is an action against Lee Weiss and his controlled entity Family Endowment Partners, L.P. Mr. Weiss is a registered representative affiliated with a broker-dealer and FEP is a registered investment adviser. The complaint alleges a series of self-dealing transactions in which the defendants defrauded investors. First, between 2010 and 2012 they caused advised funds to put more than $40 million in a French company through illiquid loan agreements without disclosing the multiple conflicts of interest Mr. Weiss had with the company. Those include his personal investment in the firm’s parent. Second, during the same period defendants advised five FEP clients to put about $8.25 million into notes or shares of companies under Mr. Weiss’ ownership or control without disclosing that the money would be used primarily to pay millions of dollars in delinquent debt and business expenses of FEP or that the notes might never be repaid. Third, in late 2011 defendants advised four FEP clients to invest $5 million in a consumer loan portfolio managed by a specialty finance company. Defendants did not disclose that Mr. Weiss would profit from the investments through a sham structure he created. Mr. Weiss also arranged for the investors to be paid half of the 18% return offered by the financing company while pocketing the difference. Finally, FEP Fund I was managed in a manner that is inconsistent with its investment strategy. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 204(b)(5). The case is pending. See Lit. Rel. No. 23370 (Sept. 29, 2015).
Insider trading: In the Matter of Christopher Mire, Adm. Proc. File No. 3-16849 (September 29, 2015) is an action centered on the January 13, 2014 announcement that IberiaBank Corp. would acquire Teche Holding Company. Prior to the announcement, Mr. Mire leared about the deal from his ex-wife and then companion. She was an assistant to Teche’s senior vice president and COO. Although she instructed him not to trade he purchased 140 shares of IberiaBank stock before the deal announcement. Following the announcement he had profits of $2,128.21. The Order alleges violations of Exchange Act Section 10(b). Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and agreed to disgorge his trading profits, pay prejudgment interest and a penalty equal to the amount of the disgorgement. See also In the Matter of Eddie R. Leblanc, Adm. Proc. File No. 3-16848 (Sept. 29, 2015)(settled action against an employee of a Teche subsidiary who learned about the deal from the CEO of the firm and purchased shares yielding $15,045.72 in illegal trading profits; settled with a consent to a cease and desist order based on Exchange Act Section 10(b), disgorgement of the trading profits and the payment of prejudgment interest and a penalty equal to the trading profits. A three year officer/director bar was imposed).
Offering fraud: In the Matter of Pankajkumar Srivastava, Adm. Proc. File No. 3-16267 (September 29, 2015) is a proceeding which names as Respondents Mr. Srivastava and Nataraj Kavuri, both residents of India. Both are involved in software and web design. The Order alleges that Respondents engaged in a pooled offering through a website beginning in April 2013. Investors were offered three alternative investments depending on the amount of the investment. Each had a guaranteed high yield return. The investments had “the hallmark of a typical highly suspicious offering called a high-yield investment program,” the Order claims. The Order alleges violations of Securities Act Sections 17(a)(1) and (3). To resolve the proceeding Respondents agreed to an undertaking not to sell securities in the U.S. In addition, they consented to the entry of a cease and desist order based on Securities Act Section 17(a). No penalty was assessed based on financial condition.
Inaccurate records: In the Matter of Hyperdynamics Corporation, Adm. Proc. File No. 3-16843 (September 29, 2015). The Order alleges that the firm failed to accurately record certain payments made by its subsidiary in the Republic of Guinea. Initially those payments were recorded as lobbying and public relation expenses without adequate evidence. Later it was determined they came from a company controlled by an employee but they were not recorded as related party transactions. The firm also has inadequate internal controls. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The Commission considered the remedial actions of the firm which included retaining an in-house attorney, increasing its accounting staff and revisions to its procedures. The firm resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the company will pay a civil penalty of $75,000.
Insider trading: SEC v. Spallina, Civil Action No. 15-cv-7118 (D.N.J. Filed September 28, 2015). The case centers on the acquisition of Pharmasset Inc. by Gilead Sciences Inc. Named as defendants are Robert Spallina, a partner in the law firm of Spallina and Tescher, P.A.; Thomas Palermo, a registered representative in a brokerage firm; Brian Markowitz, a securities trader who is the neighbor of Mr. Spallina and also one of his clients; Steven Rosen, a CPA; and Donald Teascher, also a partner in Spallina and Trescher. In early September 2011 Gilead made an initial offer to acquire Pharmasset. Subsequently, Gilead agreed to be acquired if the share price increased to $137 per share. The firms agreed. On November 21, 2011 a joint press release announcing the tender offer was issued. In early November Pharmasset Board Member met with his personal legal, tax and estate planning team in his office. Those present included Messrs. Spallina, Tescher, Rosen, a financial adviser and another accountant. During the one hour meeting the transaction to acquire Pharmasset was discussed since Board Member held a sizable block of stock. Within hours of the meeting Messrs. Spallina, Tescher and Rosen purchased Pharmasset securities. Later Mr. Spallina tipped his long-time friend Thomas Palermo. In a separate discussion Mr. Spallina tipped Brian Markowitz. Both traded. Following the deal announcement each defendant sold his shares. Collectively the five men had profits of $234,186. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the charges each defendant agreed to pay disgorgement, prejudgment interest and a penalty. In each instance the penalty equals the disgorgement. Mr. Spallina will pay $39,156; Mr. Tescher $9,937; Mr. Rosen $27,634; Mr. Palermo $124,529; and Mr. Markowitz $32,9321. See Lit. Rel. No. 23368 (Sept. 28, 2015).
Financial fraud: In the Matter of Trinity Capital Corporation, Adm. Proc. File No. 3-16837 (Sept. 28, 2015) is one of four actions arising out of the financial fraud at Trinity Capital Corporation, a holding company for Los Alamos National Bank of Los Alamos, New Mexico. Other actions name: CEO William Enloe, Chief Credit Officer Jill Cook, senior lending officer Mark Pierce, CFO Daniel Bartholomew and V.P. of internal audit Karl Hjelvik. In 2010 the bank was under a supervisory agreement. It also had a portfolio of delinquent loans. Messrs. Enloe and Pierce, in conjunction with Ms. Cook, engaged in a scheme which significantly improved the operating results of the bank by not identifying loans were it was probable the bank would be unable to collect – the losses were not recognized. Specifically, in some instances documents were drafted to avoid triggering a review of the troubled loans; in others the impairment of the collateral was ignored; and in other instances appraisals that indicated a lower value were ignored. In some cases documents were prepared which concealed the true condition of the loan. As a result of the fraud in its 2010 annual filing the loan loss provisions were significantly understated as were impaired loans. Reported pre-tax income of $1.9 million should have been a pre-tax loss of $5.4 million. The Order as to the bank alleged violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(B. The bank resolved the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay a penalty of $1.5 million. See also In the Matter of William C. Enloe, Adm. Proc. File No. 3-16838 (Sept. 28, 2015)(CEO settled, consenting to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) and agreeing to pay a penalty of $250,000); In the Matter of Daniel R. Bartholomew, Adm. Proc. File No. 3-16839 (Sept. 28, 2015)(naming the former CFO and v. p. of internal auditing Karl I. Hjelvik; both settled, consenting to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B); following the conclusion of the case against Ms. Cook and Mr. Pierce, a hearing will be held in this case regarding possible penalties); SEC v. Cook, Civil Action No. 15-cv-00864 (D. N.M. Filed Sept. 28, 2015)( names as defendants former COO Jill Cook and former senior lending officer Mark Pierce; the complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5); the case is pending). See Lit. Rel. No. 23367 (Sept. 28, 2015).
Blue sheets: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-16835 (Sept. 28, 2015) is a proceeding alleging that the firm furnished the SEC with inaccurate blue sheet information. Specifically, from January 2012 to January 2014 the firm furnished the Commission with inaccurate trading information by omitting over 553,400 reportable trades. The error resulted from certain technological and human errors. Changes have been made to correct the situation. The Order alleges violations of Exchange Act Section 17(a). The firm resolved the matter, admitting to the basic facts, and consenting to the entry of a cease and desist order based on the Section cited in the Order as well as a censure. The firm will also pay a penalty of $4,250,000. The SEC considered the remedial efforts and the cooperation of the firm in determining to accept the offer of settlement.
Offerings: In the Matter of Steven J. Muehler, Adm. Proc. File No. 3-16836 (September 28, 2015) is an action which names as Respondents Mr. Muehler, Alternative Securities Markets Group and Blue Coast Securities Corp. Beginning in August 2013 Respondents offered services to investors which included structuring and preparing securities offerings and moving filings through the Commission’s offering processes. To solicit clients Respondents claimed to have extensive experience in the area. The claim was false. Despite not being a registered broker dealer, Respondents signed up about 30 clients. The Order alleges violations Exchange Act Sections 10(b) and 15(a). The proceeding will be set for hearing.
Fraudulent offering: SEC v. Mahabub, Civil Action No. 1:15-cv-02118 (D. Colo. Filed September 25, 2015) is an action which names as defendants Taj Mahabub, GenAudio, Inc. and Astounding Holdings, Inc. Each firm is a private entity controlled by Mr. Mahabub who is the founder and CEO of GenAudio. That firm claims to have in development three dimensional audio. Astounding Holdings is the successor to GenAudio. Beginning in late 2009 Defendants marketed shares of GenAudio to the public, representing that the firm was valued at about $1 billion and was going to be acquired by Apple. In reality Mr. Mahabub had discussions with mid-level Apple employees and nothing more. Nevertheless, about $6.8 million was raised from the public. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 23363 (Sept. 25, 2015).
Financial fraud: SEC v. Garthright, Civil Action No. 23361 (S.D. Fla. Filed September 25, 2015) centers on a financial fraud at SMF Energy Corporation. The defendants are: CEO and Chairman, Richard Gathright; Senior Vice President and CFO, Michael Shore; CAO and Vice President of Finance and Accounting, Laura Messengaugh; and Senior Vice President of Marketing and Sales, Robert Beard. SMF’s primary business was commercial mobile-fueling and lubricant distribution. In 2004 SNF created a billing practice called Incremental Volumetric Allowance or Incremental Allowance — the IA. The IA, applied initially to select customers, resulted in charging the customer for fuel that was delivered and, in addition, a surcharge for fuel that was not actually delivered. Initially, the charge was 4%. Over time it reached 33%. In late 2011 Mr. Gathright left SMF. He was replaced by Steven Goldberg, a long-time director and chair of the audit committee. Mr. Goldberg was provided with materials regarding the IA and tables showing its impact by Defendant Shore. Mr. Goldberg was advised by counsel that the practice was improper. He advised the board of directors. Counsel for the board agreed that the charge was improper. The IA practice ended in March 2012. A press release was issued stating that the firm was changing its pricing structure and reducing sales and revenue projections. SMF filed for bankruptcy in April 2012. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23361(Sept. 25, 2015).
Misappropriation: SEC v. Woodley, Civil Action No. 4:15-cv-2767 (S.D. Tx. Filed September 22, 2015) is an action which names as a defendant Eldrick Woodley, d.b.a. Woodley & Co. Wealth Strategies. Mr. Moodbley, an investment adviser, is alleged to have misappropriated about $147,000 from his clients by furnishing the custodian of the accounts with invoices for services and transactions that were fraudulent. The complaint alleges violations of Advisers Act Sections 206(1) and (2). The action is pending. See Lit. Rel. No. 23366 (Sept. 28, 2015).
FCPA
Andres Truppel, a former Siemens AG employee, pleaded guilty to one count of conspiring to violate the FCPA’s anti-bribery, internal controls and books and records provisions and to commit wire fraud. Mr. Truppel was employed by Siemens AG from 1997 to 2004. From 1996 to 2002 he was the CFO of Siemens Argentina, a subsidiary. In 1994 the government of Argentina issued a tender for bids for a national identity card project, valued at $1 billion. Mr. Truppel caused his firm to pay $100 million in bribes to secure the project. Later when it was prematurely dropped he caused the firm to institute a sham arbitration in Washington, D.C. over the payments while continuing to pay bribes to maintain the secrecy. Ultimately he caused the firm to settle the proceeding, paying $8.8 million. Charges against other individuals in the indictment are pending.
SEC v. Hitachi, Ltd., Civil Action No. 1:15-cv-01573 (D.D.C. Filed September 28, 2015). Hitachi’s subsidiary, Hitachi Power Europe gmbH or HPE, was an international supplier of boilers for power stations. The subsidiary and its parent began planning to enter the South African power market in 2003. At the time Eskom Holdings SOC Ltd., the largest government owned and operated utility in the country, was planning to build new power stations. Two years later Hitachi Power Africa (Pty) or HPA was formed to establish a local presence. To secure a place in the market, 25% of is shares were sold to Chancellor House Pty (Ltd), owned by Chancellor House Trust. The firm was an alter ego for the African National Conference or ANC, the ruling political party. A shareholder agreement recorded the terms of the arrangement. A success fee was agreed in a side deal.
In May 2006 Eskom invited Hitachi and others to tender for work on building a power station. The next year Eskom invited tenders for a second station. Eventually both were awarded to HPA. At the time of the first tender the initial news article appeared reporting that Chancellor House was the alter ego of the ANC. The claim was reiterated in subsequent articles.
After the award of the contracts, HPA paid fees of $1,123,382, incorrectly recorded as “consulting fees.” Its books and records were rolled up into those of the parent and filed with the Commission. The success of the power plant projects entitled Chancellor House to a share of future profits as a 25% shareholder. In March 2010 HPA declared a dividend of about $7,032,680 for the shareholders based on 2009 profits. Chancellor House was due a dividend of about $1,758,170. That entry was reflected in HPA’s books and records which were consolidated into those of its parent and filed with the Commission. In February 2014 HPE repurchased the Chancellor House shares for about $4.4 million. The complaint alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
To resolve the matter the Hitachi consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. The company also agreed to pay a civil penalty of $19 million.
PCAOB
Inspections: The Board staff issued its Inspection Brief Details Objectives for registered auditors. In general it focuses on auditing internal control over financial reporting, assessing and responding to risks of material misstatement and auditing accounting estimates (here).
New Articles
Insider trading: Yesha Yadav, Insider Trading and Market Structure, Vanderbilt Univ. L.S. Working Paper No. 15-22. The paper discusses the impact algorithmic trading on insider trading [available on SSRN].
Insider trading: J. Kelly Strader, (Re)Conceptualizing Insider Trading, 80 Brookline L.R. 1 ((2015). The paper discusses the impact of Newman [available on SSRN].
SEC Stats: Urska Velikonja, Reporting Agency Performance: Behind the SEC’s Enforcement Statistics, 101 Cornell L. Rev. 1 (forthcoming 2016). The paper discusses the SEC’s inflation of its enforcement statistics [available on SSRN].